Pacific silver | Economy | South East Asia
Much depends on exactly what is meant by the term “sustainable”.
As the Straits Times reported, last week United Overseas Bank (UOB) issued $1.5 billion worth of sustainability bonds. According to the report, the bank “will use the proceeds to finance or refinance qualifying businesses and projects in areas such as green buildings and renewable energy, as well as qualifying social assets,” which include temporary bridging loans to small businesses. businesses during the pandemic. . It would be the first sustainable bond issued in Singapore and it was oversubscribed, indicating that there is strong investor demand for such instruments.
These bonds are part of an emerging movement of green or sustainable finance (the most developed markets are in Europe and the United States), in which the efficiency of capital markets is used to help meet the challenges of the climate change and sustainable development. The basic idea is that investors are increasingly interested in financial assets that generate not just a return on capital, but some sort of environmental or social benefit. This creates a demand for financial instruments, such as bonds, specifically aimed at sustainable development.
Sounds good, but it gets a little tricky when trying to figure out exactly what is considered sustainable. Investments in renewable energy are generally considered eligible. But what about irrigation projects, transport infrastructure, food security or employment programs? It depends on your definition of sustainability, and there is not, to my knowledge, an agreed definition at the global or even regional level. Sustainable finance is relatively new in Southeast Asia, so there are a number of green or sustainable bonds issued that cover a wide range of projects.
The Asian Development Bank (AfDB) has been active in promoting the concept and has helped several member countries develop frameworks or launch green bonds. This includes a simple example in Thailand, where energy company B.Grimm issued 5 billion baht (about $155 million at the time) in green bonds that were used to finance or refinance the construction of nearly 100 MW. of solar energy. The AfDB itself underwrote the bonds, and the projects have been completed and are now producing electricity, part of Thailand’s relatively successful nationwide push for more renewable energy investment.
Looking at Indonesia, the picture becomes a bit more complicated. Since 2018, the Department of Finance has issued a cumulative total of $3.24 billion in sukkuk green bonds (Islamic). According to the latest allocation report, revenues in 2019 and 2020 were used by various ministries for various purposes, including renewable energy, but also for railway infrastructure, food security and irrigation projects. Essentially, the proceeds from these bonds are used to fund a variety of public works projects and are explicitly prohibited from being invested in fossil fuel projects.
It might not be the first thing that comes to mind when you think of green finance, but I think it’s a good thing that this type of bond is being issued. Whether they fund solar power, job retention programs, or rail infrastructure improvements, these projects are good for overall economic well-being and development. And appealing to the capital markets is a good way to pay them. The part that remains a bit confusing is whether introducing the concept of sustainability adds any real value in the absence of carefully specified and universally accepted definitions.
Green or sustainable bonds have been issued in Singapore, Thailand and Indonesia to finance many different types of projects, all of which you could in one way or another qualify as sustainable. But markets tend to work best when all participants have access to the same information and everyone agrees on what that information means. A framework governing green or sustainable bonds across ASEAN would help make the market for these financial instruments more transparent, efficient and ultimately more efficient.